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Breaking Myths Vs. Breaking The Truth Of Entrepreneurship Ecosystems

In a recent HBR blog post, Babson College’s Dan Isenberg threw some much-needed cold water on many of the nostrums floating around about how to build entrepreneurship ecosystems. Isenberg’s list of true-false statements provides an opportunity to highlight what is still unknown about these ecosystems, demonstrate areas where communities are actively learning, and qualify some points of confusion.

Entrepreneurship is one of the hottest topics in economic development today, and cities, states, regions, and counties all over the world are trying to build entrepreneurship ecosystems or startup communities. (It has even stretched into government itself.) Unfortunately, a frenetic level of activity, in the name of supporting entrepreneurs, does not necessarily translate into actual entrepreneurship. Accelerators, co-working spaces, and incubators are popping up everywhere, and every college and university now has some sort of entrepreneurship offering. Initiate all of this at once, the hypothesis runs, and you have a burgeoning entrepreneurial ecosystem.

Only one of these things has actually been the subject of widespread research—incubators—and the results are not encouraging. In a nutshell, incubators do a great job of hosting companies, but a much less effective job of putting those companies on a pathway to independence and success. We should not automatically extend these research findings to other programs—in fact, there is almost no research on the impact of accelerators and co-working spaces. This is a big opportunity for research and one of the next frontiers in entrepreneurship.

The point of many of these programs, moreover, is not necessarily company creation or high-growth entrepreneurship, and so their value to building an entrepreneurial ecosystem should not always be judged by that. Assessments of entrepreneurship education have found small effects on the actual launch of a business, but significant effects on entrepreneurial intention and motivation. That’s vital for ecosystems, too. There’s an important difference between something that’s been shown not to work, and simply not knowing whether something works.

Likewise, far more research and data are needed on financial incentives, such as angel tax credits. More and more states have enacted these, but with little empirical basis and few evaluations. We are suspicious, like Isenberg, that these will stimulate entrepreneurial activity, but we are happy to be persuaded otherwise with systematic assessments.

The role of large companies in entrepreneurial ecosystems is less in doubt. They may be bureaucratic and destroy just as many jobs as they create but, as Isenberg notes, they are sources of entrepreneurs and early customers. In addition to direct defensive actions, however, the biggest threat that large companies pose to entrepreneurial ecosystems is the enforcement of non-compete agreements. One accelerator we spoke to recently described itself as a “witness protection program” vis-à-vis the large employer in town. Big companies are essential, but that doesn’t mean they’re willingly essential.

Of course, the most essential element in an entrepreneurial ecosystem is entrepreneurship: the creation and growth of new companies. Entrepreneurship is not necessarily synonymous with small business and self-employment, and any conflation of the three should be suspect. There is also a distinction between high-growth firms and scale-up companies. A vibrant economy—at any geographic level—needs all of these, but the principal aim of those building entrepreneurial ecosystems is usually higher rates of both startups and scale-ups. These are not mutually exclusive and, sensibly, simply forming more LLCs will not generate more fast growing, scaling, or economically productive companies.

However, the substantial decrease in the per capita startup rate, which has been occurring in the United States for several years (predating the Great Recession), means the number of potentially growing companies reciprocally decreases as well. Accompanying a falling business creation rate has also been a narrowing of the employment growth rate distribution: we’re getting less job growth from fast-growing firms, which means lower job creation overall. More new business creation is not an economic silver bullet, but sustained economic growth will not occur without it.

Inevitably, the popularity of entrepreneurship has been accompanied by naïve promotional efforts and thoughtless imitation. But, within the supposed falsities there is also a good deal of experimentation going on. What is needed is not a black-and-white truth test, but more resources put into research and data so that we have a solid empirical base to support those experiments and learn from them. That’s the only way to get at the truth.

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